How will Brexit affect energy prices?
In this blog, we explain how Brexit could impact UK energy prices. Different scenarios have different consequences. Read this if you’re concerned about what your energy bill may look like post-Brexit.
The UK’s place in the Internal Energy Market
The UK is currently a member of the EU internal energy market (IEM). During the 1990s, when most national electricity and natural gas markets were still monopolised, the European Union and the Member States decided to open these markets gradually to competition.
In the post-war period, the UK relied on nationalised organisations like British Gas and the Central Electricity Generating Board to provide power. The attitude for the second half of the century was “to keep the lights on”, rather than pursue the cheapest generation route.
The privatisation of these organisations allowed for more competition to enter the UK energy market.
In the IEM, both domestic and industrial customers can now choose their own gas and electricity suppliers from a wider range of competitors. Unfortunately, though, the UK’s energy market has only transitioned from a monopoly to an oligopoly (i.e. The Big Six).
The IEM also allows for tariff-free trading of gas and electricity across Europe through interconnectors. The UK currently has five interconnectors with continental Europe, and there are more planned/under construction.
For example, the UK currently imports 7% of its electricity from Europe. The government hopes to increase imports to 20% by 2025.
But, UK homes and businesses could face much higher energy bills if the UK crashes out of Europe.
Life after Brexit
Since the referendum, it seems that UK voters agree that there will be at least some short-term disruption to leave the EU. The answer to what happens in the long-term changes depending on who you ask.
We have already suffered some costs post-referendum. For example, the pound (£) has devalued by 20% since the UK voted to leave the EU.
In 2017, the UK imported $617bn worth of goods and services. This made the UK the 5th largest importer in the world.
In comparison, the UK exported $395bn in 2017. That made the UK the 10th largest exporter in the world. This was a trade deficit of $222bn.
A weak pound means imports cost more.
UK-based exporters may benefit from a weaker pound. But, ultimately, we import 61% of our goods and services, and only export 39% of them.
If the UK Government gets a deal
The UK also imports more gas and electricity than it exports. In 2018, imports of gas were worth £10.8bn and exports £1.8bn. Imports of electricity had a value of £1.3bn and exports £0.1bn.
Alongside plans to increase the amount of energy we import, electricity interconnection capacity is due to nearly double by 2022 with numerous projects under construction.
The UK Government, under the 2017 Clean Growth Strategy, is aiming to reduce our use of gas too. This will mean increasing our use of electricity for heating, transport and more.
Currently, we enjoy tariff-free energy within the IEM. The flow of electricity between interconnected markets is driven by cost differentials. When the price of electricity is lower in one market, it will travel from that market to a higher-priced market.
As wholesale gas and electricity prices in the UK are generally higher than elsewhere in Europe, interconnection has caused a reduction in UK prices.
The UK also benefits from marketing coupling in the IEM. This is a more efficient means of trading, which reduces operations costs. If we decouple markets, the cost of imports will go up.
The UK Government position isn’t totally clear, but they have expressed an interest in remaining fully integrated with the IEM post-Brexit. This would mean compliance with current and future EU energy market rules, as well as certain EU environmental legislation.
Unfortunately, the rules of the IEM are upheld by the European Court of Justice (ECJ). The ECJ has been a huge talking point of Brexit, as people who support Leave want to “make their own laws.”
The Lords EU environment and energy sub-committee has concluded that continued participation in the IEM “is unlikely to be possible if the [UK] Government pursues its policy of leaving the Single Market and the jurisdiction of the ECJ.”
If the UK Government doesn’t get a deal
Currently, in the event of no deal, the UK will leave the IEM.
This means European energy law will no longer apply to the UK. The UK’s electricity markets will be decoupled from the IEM too.
We will continue to import energy from the IEM, but costs will increase due to new inefficiencies. The UK will continue its use of the existing interconnectors but on different arrangements.
Both the UK and the EU would also have the option of imposing tariffs on gas and electricity. For example, the UK imported over £12bn of energy in 2018. The government may introduce a tariff to raise tax revenues post-Brexit.
In a no-deal scenario, the UK Government would trade on World Trade Organisation (WTO) rules. The UK will be able to impose tariffs on any products and services of their choice. But, this will likely negatively impact both businesses and customers based in the UK.
The National Grid informed the Business, Energy and Industrial Strategy (BEIS) Committee that energy security will not be at risk.
However, if the UK were to leave the IEM, plans for future interconnectors could be more difficult. These play a vital part in both the UK’s and EU’s transition from fossil fuels to renewables.
If the UK’s energy mix doesn’t have increased flexibility in the future, this could increase the probability of power outages.
Consumer and household bills post-Brexit
After the referendum, gas and electricity bills rose by £2bn because of the pound’s value dropping. This translated into an average household’s bills increasing by £35 for electricity and £40 for gas.
Researches from the University College London have predicted that bills could rise by a further £61 every year following the referendum.
A report, commissioned by the National Grid before the referendum, predicted that energy bills could increase by £500m every year by the 2020s if the UK leaves the IEM.
Operation Yellowhammer, the UK Government’s no-deal planning report, also predicted a significant increase in energy prices for both businesses and consumers.
It’s difficult to predict exactly what will happen, but the combination of a devalued pound and less access to markets, UK businesses and consumers can expect significantly higher bills.
Taxes on other imported goods
Currently, the UK Government is negotiating the Withdrawal Agreement with the EU. In a no-deal scenario, we would not have an agreement and would instantly begin trading on WTO rules.
If the UK and EU do agree, they would then begin negotiating a trade deal. Deal or no-deal, the UK Government will be able to impose tariffs without having to agree with the EU Member States.
If the UK imposes tariffs on one good or service, countries/unions may react with imposing their own tariffs.
It is predicted post-Brexit that the pound will drop in value again. The softer the Brexit, the less it is predicted to devalue. But also not leaving or remaining is causing uncertainty; this has resulted in less business investment in the UK, for example.
At Solar Plants, many of our products are imported from the EU. This means that if the pound drops further in value against the euro, the price of our imports will increase.
We believe in using high-quality products for our customers. We predominantly source from Europe rather than places like Asia.
If you are considering installing solar PV or battery storage, we recommend placing an order before Brexit and before the pound possibly drops in value even further.
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